Premier Foods sales hit by supermarket price war

Shares in Premier Foods slumped by almost 10pc as the owner of Mr Kipling cakes, Loyd Grossman sauces and Oxo cubes warned that a price war in the supermarket industry is taking its toll on sales.

The company said that sales of its leading “power brands” are now likely to fall in the second quarter of 2014 and that Premier is unlikely to hit its target of growing sales by 2pc to 3pc in the year as a whole.

In a trading update, Premier blamed the worse than expected performance on “subdued grocery markets”.

Shares in Premier, already down sharply in 2014 due to a highly-dilutive rights issue, fell 5.5, or 9.6pc, to 52p.

The warning on sales from Premier is the latest example of the impact that the supermarket price war is having on a range of businesses.

Tesco, Asda, Sainsbury’s and Morrisons are all lowering the price of key grocery items as they battle for sales. The price cuts are a response to the German discounters, Aldi and Lidl, grabbing sales.

Morrisons warned this week that it will cut 2,600 jobs as it adapts its stores for the evolving grocery industry, while analysts at Shore Capital warned that Tesco and Sainsbury’s could be forced to make similar cuts.

The supermarkets are Premier’s biggest customers and the price cuts can have two effects.

First, if the price cuts are on Premier products then sales are less valuable. Second, when the cuts are on a supermarket’s own-brand range, demand for Premier’s brands could be lowered.

Clive Black, analyst at Shore Capital, said that sales of Premier’s flavours, seasoning and easy-eating brands – such as Oxo – had been particularly hit. He described Premier’s performance as “disappointing”.

Nonetheless, Premier, which has been battling to reduce its debts in recent years, stood by its profit forecasts for 2014. The company said that cost-cutting and investment in some of its brands, such as Mr Kipling, should offset the drop in sales.

Alongside the trading update, Premier revealed plans to manufacture its powered beverages and desserts through a joint venture.

Premier is to place its Knighton factory in Staffordshire into a joint venture with the privately-owned group Specialty Powders Holding Limited. The venture, called Knighton Foods, will produce own-brand products for supermarkets, as well as products for the Bird’s, Angel Delight and Marvel brands.

Premier will continue to own those brands but will license its Brown & Polson range of home-baking ingredients to the joint venture for five years.

The partnership will allow Premier to switch two production lines from Knighton to its manufacturing plant in Ashford in Kent. Premier will own 49pc of the joint venture.

Gavin Darby, chief executive of Premier, said: “This innovative agreement will help to improve the efficiency of Premier’s grocery infrastructure and, at the same time, allows us to benefit from a dedicated team with expertise that can support our powdered beverages and desserts business.”